An IRS audit is a review conducted by the Internal Revenue Service to verify the accuracy of your tax return and ensure compliance with tax laws. It is not necessarily an indication of wrongdoing but a routine check to maintain tax system integrity. Understanding each stage of the audit process can help reduce anxiety and enable you to respond appropriately.
Why Are Returns Selected for Audit?
The IRS selects returns for audit based on various factors, including automated computer screening that looks for discrepancies or unusual items. Common triggers include mismatched income reported by employers or banks, unusually high deductions relative to income, frequent business use of home claims, cash-heavy businesses, or random selection.
Step 1: Receiving the IRS Audit Notice
An audit begins when the IRS sends a formal notification letter by mail. Commonly, individuals receive Letter 2205-E, while businesses get Letter 2205-F. The notice outlines the tax year(s) under review, the type of audit (mail, office, or field), the items under examination, required documentation, and deadlines. It is crucial to read this notice carefully and respond by the deadline.
Step 2: Preparing Your Documents and Response
After receiving the notice, collect all relevant records such as bank statements, receipts, pay stubs, investment details, and documentation supporting deductions or credits claimed. Contact your tax preparer or a qualified tax professional for guidance. You can authorize your representative to communicate with the IRS using Form 8821 (Tax Information Authorization).
Step 3: Types of IRS Audits
- Mail Audits: The most typical form, handled through correspondence where you submit documentation via mail or electronically within a specified time.
- Office Audits: Require a visit to a local IRS office to provide documentation and discuss your return with an IRS agent.
- Field Audits: More extensive and less common; an IRS agent visits your home or business to review records on-site.
Step 4: During the Audit
Be cooperative, professional, and stick to providing only the requested information. Keep records well-organized and clarify any uncertainties with the auditor. For added support, consider professional representation from a CPA, Enrolled Agent, or tax attorney.
Step 5: Audit Outcomes
The auditor’s review results in one of three conclusions:
- No Change: Your tax return is accepted as filed.
- Proposed Changes: Adjustments indicating you owe more tax, including penalties and interest.
- Refund Due: In rare cases, the IRS may determine you overpaid.
Step 6: Responding to Audit Findings
If you agree with the findings, you sign an agreement form, and payment arrangements are made. If you disagree, you can appeal through audit reconsideration, the Office of Appeals, or eventually U.S. Tax Court. The IRS provides instructions and deadlines for appeals.
Step 7: Appeals Process
To challenge proposed changes, submit a formal protest letter explaining your position with supporting evidence within the required timeframe, typically 30 days. The Office of Appeals reviews the case impartially with the aim to resolve disputes without litigation. Mediation or fast-track settlement options may also be available.
Step 8: Finalizing the Audit
After resolutions, the audit closes. If you owe taxes, penalties, or interest, timely payment is required to avoid further penalties. If you are due a refund, the IRS will issue it.
Tips to Navigate an IRS Audit Successfully
- Remain calm and organized.
- Provide accurate and complete information but avoid volunteering unnecessary details.
- Understand your taxpayer rights; resources like the IRS Taxpayer Advocate Service can assist.
- Seek professional help if uncertain.
Common Pitfalls to Avoid
- Ignoring IRS notices can lead to default judgments.
- Over-sharing beyond requested documentation complicates the process.
- Providing false information can result in severe penalties.
- Neglecting to appeal when justified forfeits your rights.
Frequently Asked Questions
How long does an IRS audit take?
Duration varies. Mail audits may take weeks to months; office and field audits can last several months or more.
Can the IRS audit a return after I’ve paid?
Yes. The IRS typically has up to three years to audit a return from the filing or due date, whichever is later.
What if I can’t provide requested documents?
Communicate your situation with the auditor. They may accept alternative evidence or make adjustments. Lack of documentation often results in adverse changes.
References
- IRS: Audit Process
- IRS: Audit Your Business
- NerdWallet: What to Do If You Get an IRS Audit Notice
For more details on taxpayer rights and handling audits, visit the IRS Taxpayer Advocate Service.